Bond Bears Get Burned and Today’s Other Top Stories

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If there was an overriding market outlook at the beginning of this year, it was this: stocks will outperform bonds. But so far, thats not how its played out.

As the first quarter draws to a close, the BarclaysBARC.LN +1.00% Global Aggregate Index is up 2.5% year-to-date, soundly beating the S&P 500’s paltry 0.5% rise.

“It was a surprise,” said Anthony Valeri, investment strategist with LPL Financial. “It’s been a good quarter for bonds.”

But one quarter doesn’t make a year, strategists say the overall market sentiment remains the same. With few, if any, investment managers expecting the bond market rally to continue.

Investors and strategists attribute the first quarter’s bond market rally to a few different trends. First, toward the end of last year’s rally, stock gains accelerated alongside bond losses as investors piled into the highest-performing investments. So when 2014 rolled around, they say stocks looked a bit overheated, and bonds looked cheap.

Januarys scare about emerging markets, along with some uneasiness about disappointing reports on the U.S. economy also added to the mix. While most chalk up the bad economic data to an unusually icy winter, the combination of the sub-par reports and the emerging-markets jitters “translated into a growth scare,” Anthony Valeri of LPL Financial noted. Providing a shot in the arm for bonds.

Despite this most investors, strategists and advisers remain bullish on the stock market. Andrew Slimmon of Morgan Stanley said he’s looking for stocks to take the lead again later this year, and expects sectors focused on global growth, like materials and industrials shares, to outperform.

And Anthony Valeri said LPL Financial’s position is that the bond-market strength is “unsustainable,”.

So while bond bears have taken a hiding this quarter, income investors should remain cautious. Bears have a habit of awakening from hibernation in the spring.

WSJ: – SEC reviewing municipalities’ disclosures. – Regulators have opened investigations into municipalities that may have misled investors about their financial condition, the top official at the Securities and Exchange Commission’s municipal-bond enforcement unit said Thursday.

Bond Trading

LearnBonds: – Fidelity bond trading – An in-depth look. – I recently reviewed Vanguard’s bond trading platform, presenting some things the company does great as well as various areas of opportunity. In this article, I would like to shift the attention to Fidelity bond trading.

Treasury Bonds

Barron’s: – Don’t count Treasuries out. – Most signs point to a hard road ahead for U.S. Treasuries. The biggest is Federal Reserve Chair Janet Yellen’s flashing red signal that rates could rise soon after the central bank ends its bond-purchase program. That warning continued to hammer.

FT: – Pool of top-rated sovereign debt shrinks. – The triple A government bond is dead. Long live the double A bond. The global pool of government bonds given a top rating by all three main credit rating agencies contracted 6 per cent over the past year and by more than 60 per cent since 2007, according to Financial Times analysis.

High Yield

OneGoFinance: – High-yield closed-end bond funds are a great alternative to cash in a market correction. – As the first quarter of 2014 comes to a close, caution is the word for the markets as we enter the second quarter of 2014. The second quarter has been the worst-performing quarter for the US markets in three of the past four years. The SPDR S&P 500 ETF (SPY) and PowerShares QQQ ETF (QQQ) were negative for those three quarters, and both have been negative in five of the past eight second quarters.

Emerging Markets

Forbes: – Are emerging markets too toxic to touch? – Asia Confidential has received a lot of feedback on our view of the relative attractiveness of Chinese and South Korean stocks in both Asian and international contexts. Some of the feedback has suggested that the risks with these markets are too great to make them investible at this juncture. This post is an attempt to address the issue through a deep dive into the concept of risk and how it relates to emerging markets.

IMF: – Emerging markets can manage evolving mix of global investors. – The mix of investors in emerging markets stocks and bonds has evolved considerably over the past 15 years, which has made capital flows and asset prices in these countries more sensitive to events outside their own borders, according to new research from the International Monetary Fund.

FT: – Investors re-engage with emerging markets. – Global investors are more willing to engage in emerging markets than at any time since the sell-off of last summer, according to research by Morgan Stanley – whose analysts coined the term “fragile five” to describe the most vulnerable countries.

Bloomberg: – Emerging markets regaining confidence of ETF investors. – Emerging markets drew the largest investment flows among U.S. exchange-traded funds last week on bets developing-nation stocks will rebound after they fell to the cheapest relative to developed-nation peers since 2006.

Reuters: – ING removes Pimco as subadvisor of bond funds totaling $3.7 bln. – Pacific Investment Management Co. has been removed as subadvisor of two bond funds totaling $3.7 billion offered by ING U.S. Investment Management, though the decision by ING was made late last year before a management shakeup at Pimco, according to a regulatory filing with the SEC.

Gross: Can the US economy support 3% Fed Funds and 5-6% mortgage rates in early 2018? That is the call. PIMCO says no.